Economic Crises, Stabilisation Policy and Output in Emerging Market Economies

Leon du Toit ()

No 20/2009, Working Papers from Stellenbosch University, Department of Economics

Abstract: The recent macroeconomic history of emerging market economies is coloured with economic crises of all kinds, ranging from debt-crises, through hyperinflationary periods to currency crises to name but a few. Much of the empirical literature notes that alongside fast-paced structural change this has resulted in volatile business cycles and a difficult environment for stabilisation policy. Both short- and long-run output dynamics are shaped by the multidimensional exposure of EMEs to economic shocks. The paper uses an SVAR analysis and finds that in spite of high degrees of output volatility, the conduct of stabilisation policy has sometimes been successful in dampening short-run output fluctuations. However, even when stabilisation has been successful, the effect on overall output volatility has been negligible when compared to supply-side shocks. The results show that economic crises are associated with large negative supply shocks which are only counteracted by stabilisation policy to a very small extent. These crisis-related supply shocks, in turn, have large negative effects on potential GDP growth, which are only reversible when positive supply shocks regain lost ground. Given the institutional origin of the economic crises, the paper suggests that for stabilisation policy to become more effective in lowering output volatility and maintaining long-term growth potential, it must be supported by appropriate supply-side measures which insulate EMEs against large negative supply shocks and help them to recover in the wake of economic crises.

Keywords: Economic crises; Stabilisation policy; Emerging Market Economies; Business Cycles; Potential output (search for similar items in EconPapers)
JEL-codes: C32 E32 E61 E63 (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-fdg and nep-mac
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